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Fed officials call for maintaining higher policy rates

US CPI and retail sales came in slightly below expectations.

This was welcomed by markets that had been expecting weaker figures, with US interest rates falling and both the Dow and Nasdaq reaching new highs. The dollar fell sharply from a high of around ¥156.75 to around ¥153.60.
However, while the CPI was favourable, NY Fed President Williams commented that “there is no need to cut interest rates in the near term” and that “we still lack confidence that inflation will move towards 2% on a sustained basis”, which is too much to be expected.

The USD/JPY has risen on short-covering to around ¥155, but this has also ended the CPI shock. New Unemployment Insurance Claims also attracted attention, but the figures were weak as Chairwoman Powell mentioned the slowdown in employment in a recent panel discussion.

Treasury Secretary Yellen made her third statement on Japanese currency intervention, noting that a fundamental change is needed, “unless accompanied by more fundamental changes, [intervention] does not always work”.

Fundamental changes would mean that monetary policy needs to be tightened in the short term. If Japan tightens interest rates, it will have a negative impact on stock prices, but maintaining the value of the yen has become more important. The BOJ’s decision to reduce its purchase operations may be part of this trend.

Looking ahead, it is imagined that there will be no major index releases until Friday’s PCE core deflator, and that there will be little movement. In this sense, it is difficult to go short high interest rate currencies and it seems likely that we will return to a yen carry trade, mainly shorting the yen. As it is also hard to maintain long dollar/yen at higher prices, are we likely to take profits and wait for a push? It is likely to be a calm.